Sunday, November 20, 2011

A Tale of Three Sports and their Unions-Part 1

Professional sports leagues require unions. Only a voluntary contractual agreement with organized players permits the apparatus of modern professional sports. Common apparel deals and common pool distributions as well as salary caps, required minimum expenditures on salaries and revenue sharing all need these agreements to protect a league from anti-trust challenges. The contracts permit drafts, compensation limits and trades to occur without restraint of trade challenges. Modern professional sport leagues deploy these devices to several vital goals:1)guarantee profit and return on investment; 2) maintain some competitive balance across big and small market teams; 3) police drug use; 4) give bad teams a chance to become better and construct balance competition over time. Despite each owners desire to win at all costs, they have a joint interests to steward steward a profitable sport with high quality games and competitive hopes for teams and fans.
Despite the central role of unions and their continuing and unique power, two labor negotiations broke down in acrimony—one lead the union to dissolve and players to sue the league, the other has lead to an impasse that may lose the season. Baseball, on the other hand, with little fanfare, just did a “handshake” agreement to extend labor peace to 20 years. I think these different outcomes flow from both the culture created between owners and players and the structure of incentives the contracts focused upon. In particular football and basketball narrowed in on a zero sum view of revenue tied to salary caps while baseball used luxury taxes and revenue sharing to address the chasm between small and large market teams.

Most team owners are unwaveringly entrepreneurial and aggressively libertarian in their politics. They hate having a strong union. In addition they tend to be very personally invested in the status and fate of their teams. This resistance coupled with periodic attempts to break the unions have blighted professional sports with thirty years of lockouts, strikes and bitter recrimination, reaching its height in the disastrous baseball 1997 seven month baseball strike that lead to a cancelled World Series or hockey losing an entire season in 2004-2005.

All professional sports are afflicted by the trend of large market owners buying up the best talent. Left on their own most sports would degrade to permanent oligarchies with permanent winners and losers and very frustrated and lost fans. It would also degrade the talent competition where one small group of teams would regularly trounce others based upon bought talent. Many of the union authorized mechanisms on revenue and drafts are to protect owners from destroying their sport through the dynamics of inequality in revenue as how to allocate costs among players.

In the last seven months the National Football League, the National Basketball Association and Major League Baseball had their collective bargain agreements expire. The NFL involved a four-month lock out, ugly negotiations and recriminations and immense public pressure to settle. The NBA negotiations have imploded with the NBA verging on a lost season. Baseball, which has the longest and most bitter history, has a handshake agreement to put a new agreement in place without a lockout or strike four months before the start of spring training.

Why the difference? All the negotiations involved complex and unique aspects but the chasms exist over percentage of revenue dedicated to owners and players as well as devices such as salary caps and luxury taxes to save owners from themselves and sustain some competitive balance and quality product for fans and media.

What interests me is that two sports along with hockey have used salary caps to address the issue of escalating salaries and competitive equity. To me this has always made sense, and it drives me batty that baseball has never used one. Baseball permits oligarchs to dominate talent by letting teams develop players and then the oligarchs like Boston, Philadelphia and New York buy that talent when they become free agents. The irony is that the two leagues with salary caps have generated two different economic and competitive cultures that lead to the labor chaos. Yet baseball has eschewed the rational approach, but evolved this deeper peace and even a common venture model.

While unions are dying everywhere in the United States, they thrive in professional sports because of the monopoly and monopsony of the leagues and the very limited and highly skills population from which players develop. The contacts also insulate the enterprise from many anti-trust and restraint of trade charges. So why the immense differences in outcomes of the last three negotiations?
The issue driving owners remains as always maximizing profit, long term investment and maximizing their freedom and status from being owners. Given whom the owners are, they strongly prefer not to have unions or long-term agreements with their employees.

As an example, the bitterness and contractual brinksmanship in football makes the least sense. Professional football has become the most popular and profitable professional sports enterprise in the United States. If owners are to be believed, only two teams are losing money.  Attendance and contracts rise yearly. The Super Bowl like March Madness has permuted into a cultural institution. The major device to generate quality of fan interest and quality of product has been a percentage split of revenue with players and a relatively hard salary cap.

With no guaranteed salaries, the football teams can seem to pay outlandish salaries but guaranteed salaries mean little. The real money has migrated to extremely high rookie bonuses and singing bonuses. This in turn softened the salary cap considerably. This hypothetical equality is augmented by some marginal revenue sharing to prop up smaller market teams who have trouble even reaching the salary cap minimum, but more than a few teams, as in baseball have not even spent their revenue sharing money on talent or salaries.

Part II will examine how the history and incentive approach influenced the approach and outcomes of these three labor negotiations.